Tax Planning for Foreign Executives Transferring to the U.S.

For some reason I have seen a series of issues recently involving foreign executives transferring to the United States to work on a temporary (or at least a non-permanent basis). In our global economy, multi-national corporations frequently transfer citizens and residents of foreign countries to the U.S. to work.

After a little research and a lot of in-person, practical advice, I have come to recognize that some very significant tax and estate planning opportunities – and traps– exist for foreign executives transferred to work in the U.S., especially those foreign executives who do not become citizens of the U.S., or who become green card holders but relinquish their green card after less than eight years (whether or not the company is headquartered or incorporated in the U.S.). Significant tax planning opportunities – and traps– also exist for these foreign executive upon their departure from the U.S.

This is a big subject that probably is better covered in a full-fledged NASPP presentation. However, I have decided to try to cover it in bite-sized pieces over a series of blog postings.

Under U.S. income tax rules, taxpayers are generally subject to U.S. income tax on amounts received while they are resident aliens of the U.S. for U.S. income tax purposes (a "resident alien"), even if the income arose from activities (i) completed before the taxpayer became a resident alien, and (ii) that have no connection to the U.S. Similarly, any gains realized by a resident alien are fully subject to U.S. income tax, even if the gain accrued before the executive became a resident alien.

Therefore, it is critical for a foreign national/executive moving to the U.S., who will become a resident alien, to plan the timing of his or her recognition of income and payment of deductible expenses. Briefly, and depending upon the totality of circumstances, among the methods for a non-resident alien to time the recognition of income and payment of expenses are the following:

  • exercising stock options, if any;
  • making a Code Section 83(b) election for eligible restricted stock, if any;
  • accelerating the receipt of income, such as rents, royalties, interest, and deferred compensation;
  • deferring recognition of losses;
  • perhaps selling a foreign residence to avoid subjecting any gain on the sale to U.S. income tax;
  • obtaining a step-up in basis by selling and reacquiring appreciated investment assets (so-called "bed and breakfasting"); and
  • deferring the payment of expenses that are deductible for U.S. income tax purposes until the individual becomes a resident alien.

Of course, a foreign national moving to the U.S. should not take any of these actions without first considering the non-U.S. taxes that would be imposed on the income and gains as well as the deductibility of losses and expenses under the non-U.S. tax laws to which the foreign national is subject.

Over the next couple of days/weeks, I will elaborate on some of the key tax planning opportunities and traps that exist for foreign executives transferring to, and departing from, work in the U.S. (I will add in some estate planning opportunities that I have learned as well, but that will be stretching my expertise a bit.) In the meantime, if you are about to transfer a foreign executive to or from employment in the U.S. and cannot wait, call me.

On November 1, 1943, in the Battle of Empress Augusta Bay (Operation Cherry Blossom), the U.S. 3rd Marine Division landed on Bougainville in the Solomon Islands. In support of the landings, U.S. aircraft carrier forces attack the huge Japanese base at Rabaul (a township in East New Britain province, Papua New Guinea). It was later in this battle that Medal of Honor recipient Lieutenant Commander Edward Henry "Butch" O'Hare's F6F Hellcat was shot down and never found.